5 Gaming Stocks for 2014

2013 was an exceptional year for gaming stocks and as the calendar prepares to roll over investors are looking at what's on tap for gaming stocks for 2014.

In 2013, companies with exposure to Macau, like Melco Crown, Las Vegas Sands (NYSE: LVS  ) , and Wynn Resorts (NASDAQ: WYNN  ) , had a great year on the back of growing revenues and profits. Surprisingly, as you can see in the chart below, Caesars Entertainment actually led the industry despite operational difficulties that make a turnaround seem improbable, but betting on a turnaround was what traders were looking for this year.

MPEL Total Return Price Chart

MPEL Total Return Price data by YCharts.

So, where should investors turn in 2014 after such outstanding gains in 2013? Here's a look at five companies I think will do well next year.

The home of top gaming stocks
Any discussion about gaming stocks needs to start with Macau, which has grown to be more than six times the Las Vegas Strip in gaming revenue. The region grew 18.6% in the first 11 months of this year compared to 2.1% growth on the Las Vegas Strip over the past year.

Most of that growth is concentrated on Cotai, where Melco Crown, Las Vegas Sands, and Galaxy have built sprawling casinos to attract mass-market gamblers and VIPs. The strategy has worked and over the next few years all six concessionaires in Macau -- including Wynn Resorts and MGM Resorts (NYSE: MGM  ) -- will open resorts there. You can see the future layout in the map below. 

I like the growth potential for all companies with Macau exposure, but as I explained last month, Melco Crown is so expensive I would avoid it right now. That leaves Las Vegas Sands, Wynn Resorts, and MGM Resorts as the three gaming companies that I think will outperform in 2014.

Las Vegas Sands has the advantage of being the largest resort operator on Cotai and will likely outpace Macau's overall growth next year. Wynn Resorts is a conservative operator with little near-term operational upside but a new resort that could more than double revenue and earnings in 2016. MGM Resorts is highly leveraged but it has strong cash flow from Macau and is benefiting from recent growth in Las Vegas. If the economic recovery picks up steam next year MGM Resorts could easily top all other gaming stocks.

Two equipment stock picks
Casino operators aren't the only ones to watch in gaming. International Game Technology (NYSE: IGT  ) and Bally Technologies (NYSE: BYI  ) have tremendous opportunities to fill casinos being built around the world with gaming equipment and have huge upside in online gaming.

Nevada, New Jersey, and Delaware have all legalized online gaming and before long I think national regulation is on the way. Equipment providers will offer similar services to casinos online as they do in bricks-and-mortar casinos, building the software and technology of the games, but not taking the bets themselves. Companies like MGM Resorts or Caesars won't build their own technology, they'll rely on IGT or Bally to do it for them.

It's tough to tell exactly what the revenue potential is from online gaming but we're talking about a business with the potential of billions of dollars in revenue. Even a small percentage of that pie would be a huge win for IGT and Bally and 2013 could be a turning point for this business.

Foolish bottom line
Gaming stocks have grown tremendously over the past four years but there's still a lot of upside for investors. I'm not suggesting that triple-digit gains are in the cards for gaming stocks in 2014, but these can still be market-beating companies, particularly as Macau continues to grow.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2013, at 8:05 AM, blackjackkid wrote:

    I like MGM for next year as Vegas is coming back fast as the economy here in the US finally starts taking off and more conventions and tourists visit the gambling Mecca.

  • Report this Comment On December 16, 2013, at 11:59 AM, spokanimal wrote:

    Your point about Wynn is valid in that it is conservative and will grow slowly over the next couple of years...

    ... but that it will get an outsized growth spurt from opening it's Cotai casino due to the fact that it's overall macau operations are so small that adding that resort will easily double it's presence in the SAR.

    LVS, on the other hand, is the big dog in the far east now and although adding a new, on-strip Cotai resort won't add nearly the overall operational pop that Wynn's off-strip cotai resort would add, LVS nevertheless has some significant momentum from many angles.

    To begin with, LVS has more than just Parisian. It also has the 4th, Cotai Central tower going up with significant new hotel/condo capacity to feed it's massive capacity on the strip, much of which has much to gain from the fact that it has historically been more under-utilized that those of other Macau gaming concessionaires.

    In fact, Venetian had substantially under-utilized capacity in virtually all departments before Cotai Central opened and patrons began streaming across the sky bridge that connects the 2 resorts. 4 out of the five new Cotai resorts being developed by competing concessionaires will be "adjacent" to Sands resorts (MGM off-strip behind Cotai Central, SJM off-strip behind Cotai Central, Studio City on-strip next to Parisian, Galaxy phase 2 off-strip behind Venetian, Wynn off-strip is not adjacent to a Sands resort) so expect Venetian to continue absorbing overhead and sending more and more revenue to it's bottom line for years to come.

    LVS also benefits it's recent upgrade to "investment grade" by S&P, opening the door for many institutional investors who are restricted from buying junk-grade companies to buy LVS stock. The big dividend jump from $1.40 to $2.00 next year provides further enticement.

    Finally there is Japan, where all major operators have a voice, but where the model of choice being evauated by Japanese politicians and regulators is the regulatory model practiced by LVS at Marina Bay Sands in Singapore.

    Sadly, Travis's map is the same one he used in a previous offering, and excludes the locations of half of the Macau gaming concessionaires.

    Spokanimal

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